18.08.2023 – 07:02

Arguments Show Down for Digital Assets

Karen Wendt, SFTL President & expert in responsible, impact and sustainable investing

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Arguments Show Down for Digital Assets

Opportunities and risks of digital assets

Digital assets are gaining relevance and offer new opportunities for all sectors; they are a veritable innovation, but also harbour new risks. Due to recent scandals on various C exchanges (FTX, Binance, Conbase), many market participants have only now become aware of these risks. Technological development is rapid and it is not always easy to follow the technological advances and recognise the risks. However, in order to make informed decisions, it is crucial to deal with these digital assets and how they work; digital assets have characteristics that distinguish them from traditional assets.

On the plus side, we see the following advantages:

Fast transactions: Unlike a traditional exchange, digital assets can be traded at any time of the day or night, seven days a week. No exchange is needed for this, the intermediary is abolished, transactions are executed instantly on the blockchain protocol, - no matter when a transaction takes place, end-to-end encrypted between two transaction partners.

Independence: Digital assets on a register or ledger can be stored, traded and transferred independently of intermediaries. While this brings more freedom in managing assets, it also comes with new risks, such as losing access to assets. In addition, many intermediaries that trade and hold digital assets are not financial market specialists and are only partially regulated, which has led to several scandals, e.g. Bankman Fried's crypto exchange FTX, and more recently Binance and Coinbase have also been targeted by the US Security Exchange Commission (SEC) for compliance violations.

The lack of regulation and compliance significantly increases counterparty risk. If Bankman-Fried's crypto exchange FTX goes bust, they will not see their money again. many investors have foregone the scrutiny of Bankman-Fried and its exchange and have lost their money because of the unreliable counterparty FTX. the quality of the counterparty (contracting party) is an operational risk that must always be clarified first.

Now we already had to point out some risks in the advantages. But here there are more.

Risks of Digital Assets

The risks of digital assets are also based on social trends:

Volatility: Digital assets, especially cryptocurrencies, tend to be more volatile compared to traditional asset classes, which means that their price can fluctuate greatly.

Cybercrime: The pseudonymity of decentralised networks can encourage cybercrime. There are many prominent cases where hackers demanded bitcoins as ransom after a ransomware attack, such as the attack on Colonial Pipeline in the summer of 2021.Therefore, regulation is now also to be tightened.

Because many digital assets can be traded and transferred independently of regulated intermediaries, they are also abused for money laundering. However, the authorities are also getting better at tracking such transactions, which is also made possible by the transparency of blockchains.

Environment: Blockchains that use a proof-of-work consensus algorithm like Bitcoin rely on very large amounts of energy due to the enormous computing power that the consensus algorithm requires. Newer consensus algorithms are more efficient (e.g. Ethereum reduced its energy consumption by 99 per cent by moving to Proof of Stake).

Digital assets are gaining relevance and offer new opportunities for all industries, but also pose great risks. Because many market participants are struggling to follow this technological development and the rapidly advancing technology behind it, an examination of these digital assets and how they work is central to making informed decisions.

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Karen Wendt

President of SwissFinTechLadies